BillBischoff

It’s easy to take money out of an IRA. You can do that whenever you want. However, there are tax consequences.

With a traditional IRA, you’ll be taxed on the proportion of the withdrawal that consists of deductible contributions and account earnings. If you have several traditional IRAs, you must add them together and treat them as one account to calculate the proportion of the combined balances that consists of deductible contributions and account earnings. Then use that proportion to figure the tax consequence of the withdrawal, regardless of which account it actually comes form. If you have a SEP IRA or Simple IRA set up in your name, add those accounts into the mix when running the numbers.

With a Roth IRA, you’ll be taxed on withdrawn earnings unless you’ve: (1) had at least one Roth account open for more than five years and (2) reached age 59½.

Now on to the subject of this column: It’s not so easy to put money back into an IRA when you realize the withdrawal was a bad idea. Here’s what you can and cannot do in some common situations.

You tapped your IRA for needed cash but then found a better source

For example, your rich Uncle Dudley came through with a low-interest loan because you’re his favorite relative. So you need not raid your IRA after all. Great, because you really should keep your retirement savings untouched and your IRA’s tax advantages intact if at all possible.

In this scenario, you have a 60-day window to roll over the withdrawn amount back into the same IRA or a different IRA. Start the 60-day clock on the day after the day you receive the withdrawal. As long as you redeposit the withdrawn amount within the 60-day window, it’s like the withdrawal never happened, and there are no tax consequences.

Here’s the kicker: You can only use the 60-day tax-free rollover privilege once during any 12-month period. If you take another withdrawal during that time, you will be stuck with the tax consequences on the second one.

You converted your traditional IRA to a Roth IRA and now wish you hadn’t

While converting a traditional IRA into a Roth account can be a great idea, it isn’t a tax-free idea. That’s because you must treat the converted amount as a taxable withdrawal from the traditional account. So you’ll owe federal income tax and maybe state income tax too. But you won’t owe the 10% early withdrawal penalty tax even if you’re under age 59½, because Roth conversions are exempt from the penalty tax.

Even though Roth IRAs are cool, a conversion can turn out to be an expensive mistake tax-wise if the value of the converted account plummets due to a decline in value of the investments held in the account. Unless you take action, you’re going to get hit with taxes on value that has vaporized. The solution is to reverse the conversion, and return the account to traditional IRA status. (The IRS calls reversals a “recharacterization” of the account from Roth status back to traditional IRA status.) You must get the reversal done by October 15 (adjusted for weekends) of the year after the conversion year. So you have until Oct. 16, 2017 to reverse a conversion that was done last year, and you have until Oct. 15, 2018 to reverse a 2017 conversion. As long as you get the reversal done by the deadline, it’s like the conversion never happened, and all the tax consequences go away. Contact your IRA provider for the procedure to reverse an ill-fated Roth conversion.

You took out $10,000 to buy a home, but the deal fell through

There’s an important exception to the 10% penalty tax that generally applies to traditional IRA withdrawals taken before age 59½. Subject to a $10,000 lifetime limit, you can take penalty-free early withdrawals to cover amounts spent within 120 days on qualified home acquisition costs. (You may still owe income tax on the withdrawal under the standard rules that apply to traditional IRA withdrawals.)

To qualify for the penalty tax exception, the home must be a principal residence acquired by you; your spouse; your child, grandchild, or grandparent; or your spouse’s child, grandchild, or grandparent. The buyer (and spouse if applicable) must not have owned a principal residence within the two-year period ending on the home acquisition date.

But what if the home purchase deal is seriously delayed or falls through? In that case, you can put the withdrawn amount (subject to the $10,000 limit) back into the same IRA or a different IRA before the 120-day period expires, and there will be no tax consequences. But once the 120-day window closes, you’re stuck with the withdrawal’s tax consequences.

You took out money from an inherited IRA and now wish you hadn’t

In this scenario, you’re out of luck unless you’re the deceased IRA owner’s surviving spouse. Otherwise, there’s no way for an IRA beneficiary to put back a withdrawal from an inherited account. So you’re stuck with the tax consequences. Sorry about that. Thankfully, however, you won’t owe the 10% penalty tax even if you’re under age 59½, because withdrawals from inherited accounts are exempt from the penalty tax.

Finally, if you inherit an IRA from your spouse, you can take money out for a while and roll it back into your own IRA tax-free as long as you comply with the 60-day rollover rule explained at the beginning of this column. You can also retitle the inherited account into your own name, and put the withdrawal back into what is now your own account with no tax consequences as long as you do it within the 60-day rollover window.

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